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States with lowest and highest income inequality

income inequalityMoneyRates.com first conducted a study of income inequality across states in 2014, which allows us to observe how income and other trends in earnings have changed over time.

Income inequality has been a divisive issue in recent years. Resentment over the gap between the "haves" and "have-nots" has not only influenced votes, but may be a factor in the increasingly adversarial tone of political debate.

There are significant differences in the gap between high and low wage earners from state to state. MoneyRates looked at where this gap was lowest and where it was highest, to see which states had the best and worst income inequality. The study also reviewed overall income levels and income growth rates to see what effect income inequality might be having at different income levels.

Methodology: finding states with most and least income inequality

Since absolute incomes are very different from one state to the next, MoneyRates looked at incomes on a percentile basis in each state, using the 75th and 25th percentile annual income levels based on data from the Bureau of Labor Statistics.

If you earned at the 75th percentile, you earned more than roughly 75 percent of the employees of your state, so you would be considered a high earner. If you earned at the 25th percentile, it means only 25 percent of your state's residents earned less than you, so you would be considered a low earner.

The 75th and 25th percentiles do not represent the extremes of great wealth and abject poverty, and that's the point. The idea is not to get distracted by rare outliers, but to look at states where significant portions of the population are experiencing significant differences in incomes.

To put these income differences in perspective, MoneyRates.com calculated the ratio between high and low incomes in each state to measure income inequality. No matter where you look, income inequality is significant - in all states, people at the 75th percentile earn at least twice as much as those at the 25th percentile. In some states though, high earners are approaching nearly three times the income of low earners.

Faster wage growth combats income inequality

States with relatively equal income levels have seen faster-growing wages at each earning level. Over the past four years, the states with the ten most equal earnings levels between the 75th and 25th percentiles have seen median wages grow by 8.82 percent, compared to 7.27 percent for the average across all states.

Perhaps what is most encouraging, the strongest growth in these states has been at the low income level. Earnings at the 25th percentile have grown by 9.69 percent in states with the most equal incomes, compared to 9.58 percent for 75th percentile earnings. As a result of this faster growth for lower earners, the ratio between high and low earnings has narrowed over the past four years.

States with lowest income inequality

Based on our methodology, the 10 states below show the smallest relative differences between high and low earners, so are ranked "best" when it comes to income inequality. These rankings are based on the ratio between 75th and 25th percentile earnings, and this ranking may not always correspond with the size of raw dollar differences.

Lowest inequality rank

Best 10 states

75th percentile income

25th percentile income

$ Difference

Inequality ratio (75th/25th)

1.

South Dakota

$46,700

$23,370

$23,330

2.00

2.

North Dakota

$57,380

$27,920

$29,460

2.06

3.

Vermont

$56,400

$27,150

$29,250

2.08

4.

Maine

$53,240

$24,640

$28,600

2.16

5.

Iowa

$52,170

$23,970

$28,200

2.18

6.

Nebraska

$53,250

$24,200

$29,050

2.20

7.

Montana

$50,410

$22,830

$27,580

2.21

8.

Wyoming

$58,730

$26,420

$32,310

2.22

9.

Nevada

$52,890

$23,640

$29,250

2.24

10.

Idaho

$50,470

$22,490

$27,980

2.24

South Dakota remains the best-performing state for income equality again this year. Other states newly represented among our "fairest" ten include: Montana, Wyoming, Nevada and Idaho. No longer present in our top ten states are: Mississippi, Arkansas, New Hampshire and South Carolina.

The information above might be one factor to consider when deciding which state is best to live in, or determining the best state for employment opportunities, although other factors should also be weighed.

Could income inequality be helpful?

Concern - or even anger - over income inequality has led to movements in several states to boost the minimum wage. While the gut reaction is that income inequality is unfair, a closer look suggests there may be some benefit to it. Incentives created by rewarding higher earners more may create an economic environment that boosts income levels for lower wage earners as well - a rising tide that floats all boats.

In the ten worst states for income equality, it should come as no surprise workers earning at the 75th percentile fare better than 75th percentile workers in other states, but an interesting thing happens along with that. Lower-level earners do better as well.

In the ten worst states for income inequality, median earnings are $40,757, compared to $36,553 for the average state and $35,250 for the ten states where earnings are most equal.

Even lower-level earners fare slightly better in states with the worst income inequality. Annual earnings at the 25th percentile are $25,506 in the ten worst states for income inequality, compared to $24,264 in the average state, and $24,663 in the ten states with the most equal incomes.

Concerns about income inequality

Despite their higher average incomes today, states with the worst income inequality should be concerned that incomes at all levels are growing more slowly than in states with better income equality.

Since MoneyRates first conducted this survey in 2014, median incomes in the ten worst states for income inequality have grown by 6.95 percent, worse than the 7.27 percent for the average state and the 8.82 percent for the ten states with the lowest income inequality. Growth rates at the 25th and 75th percentiles are slower as well.

Even when conditions in a state are generally good, residents and policy makers should not lose sight of the challenges faced by their lower-income residents. For example, unless residents are able to find free checking accounts with low minimum balance requirements, they may find themselves effectively shut out of the banking system.

Also, people who fall behind on retirement savings because of lower incomes may ultimately end up costing their states more in the form of reliance on social services.

These realities are especially concerning given that states with the worst income inequality have generally seen these gaps widen over the past four years. Widening income gaps plus slower growth would be especially hard on poorer residents.

States with highest income inequality

States with the largest relative differences between high and low earners are ranked "worst" when it comes to income inequality.

Worst inequality rank

Worst 10 states

75th percentile income

25th percentile income

$ Difference

Inequality ratio (75th/25th)

1.

New York

$72,360

$26,050

$46,310

2.78

2.

California

$70,380

$25,910

$44,470

2.72

3.

New Jersey

$70,180

$25,850

$44,330

2.71

4.

Maryland

$70,830

$26,280

$44,550

2.70

5.

Illinois

$64,010

$24,060

$39,950

2.66

6.

Virginia

$64,950

$24,720

$40,230

2.63

7.

Massachusetts

$75,850

$29,170

$46,680

2.60

8.

Connecticut

$71,870

$28,010

$43,860

2.57

9.

Georgia

$56,540

$22,120

$34,420

2.56

10.

Texas

$58,190

$22,890

$35,300

2.54

When we first conducted this study, in 2014, Washington, D.C. topped our list of the worst states for income inequality. This year, Washington, D.C. no longer ranks among the ten worst states. Also exiting our original list are Michigan and Louisiana. New to our worst states list are: Massachusetts, Connecticut and Georgia.

Determining the best state for employment opportunities can be challenging, but considering income inequality can be one important yardstick as you assess the best state in which to live and work.

2 Comments
felipe manteiga 11 March 2014 at 2:45 pm

Return to capital, a difficult term. Some states have been investing heaily on human and physical capital (roads, ports, security, education, health) while others, tending to have no state income tax, might have been decapitalizing (many universities in the South have significant low gradution rates, for example).Returns to capital is impoirtant, and in an expanding economy, outstrips return to labor. But when one considers the massive capital invested by the state of New York or Illinois, question surface: who captures those returns and why? If they go to those with more capital, financial, physical, human or political, then larger inequality will follow.In general, and around the world, one finds polarized incomer distribution makes the growth segment in teh cycle more shallow and fragile. In contrast, those with better distribution, tend to be longer and deeperI would like to read more on the methodology followed for this esurvey--using as key parameters the top and bottom 25% could, statistically,mask a multitude of sins.

Karl Bonner 11 March 2014 at 2:06 am

Since the surge of income inequality over the past 40 years mainly manifests at the very top, one may ask whether differences of inequality between states have to do with states having a relatively larger and smaller share of the nation's rich people living in them. Apparently rich people must find it advantageous to live in those states that happen to also be blue - states like California and New York and Massachusetts.I think the underlying division is really more a rural vs urban one. Urban areas tend to be economic hubs and produce lots of business activity and lots of wealthy residents - and lots of income inequality. But these places also tend to be cultural hubs, which ends up pushing the politics in a liberal direction. (I bet these states would be even more unequal if their state and local governments didn't lean progressive in their policymaking!)Also the same parochial culture that pushes rural politics rightward, also means a less educated and enlightened population, and one that is less capable of providing practical skills in a modern economy. That means less investment there, and fewer rich people.